Money and the Constitution

Pretty much down to a man, the Founders were hard-money guys. Nowadays, money is mostly a matter of keystrokes—of the Fed’s fiat. That changes everything—the economy, the workings of our institutions, the Constitution and its political economy. In my continuing effort to educate myself on this stuff—belatedly, in my dotage—I’ve just finished reading two fine books.

One is Benn Steil’s account of The Battle of Bretton Woods. The battle was between John Maynard Keynes, a die-hard Brit; and Harry Dexter White, a Soviet spy. Somehow the good ole U.S. of A won: go figure. I learned a ton of fascinating stuff. Particularly impressive is the author’s clear sense that the macro-econ giants, for all their towering intellect, were (and are) basically winging it. Over the decades, I think, it’s become increasingly obvious that none of them have wung very well. Even so, we entrust more and more power—over money, and the stock market, and unemployment rates, and retirement accounts—to  unelected central bankers. Not a pleasant thought.

In search of comfort—more specifically, in the hope that it might be possible to revive constitutional thoughts and arguments for institutional arrangements that would provide more economic and political stability—I picked up Richard H. Timberlake’s book on Constitutional Money. I gathered useful historical information from the author’s “Review of the Supreme Court’s Monetary Decisions,” from M’Culloch to the Gold Bond Cases. Alas, by way of constitutional thought and theory, I found little to be learned.

On the very first page of the Preface, the author cites Section 8 of Article I, which provides that Congress shall have power to (inter alia) “coin Money, regulate the value thereof, and of foreign coin, and fix the standard of Weights and Measures; and Section 10 of Article I, providing (inter alia) that “No state shall … coin Money; emit Bills of Credit; make any Thing but gold and silver Coin a Tender in payment of debts.” And then he writes:

Those passages taken together imply, first, that any legal tender money can only be gold and silver “coin,” and, second, that Congress’s monetary power is limited to managing the gold and silver content of those coins. The Constitution does not prohibit banks and other institutions from creating common money managed by “the people,’” but it clearly denies the states and the federal government, by implication, any authority to change the base of gold and silver.

Respectfully: not a single clause of this passage is remotely covered by the text. E.g., Section 10 shows that the Founders knew how to prohibit one level of government from doing specified things. If they refrained from imposing the same limitations on another level of government, the omission must be deliberate. No matter how much you want the “implication” of anti-state prohibitions to run against the feds, you have to acknowledge that the text and structure cut the other way. And you can’t crank up a constitutional de facto gold standard by implication and then harangue every justice from John Marshall on forward for an excessively loose construction of the Constitution. Regrettably, though, that’s the basic strategy of this book.

The libertarian fall-from-constitutional-grace myth-making isn’t just inaccurate but in effect, though surely not in intent, poisonous. The Founders had very firm opinions about money and banks. They could have imposed a gold standard, but didn’t. They could have chartered a national bank, but didn’t. Why not? Any serious constitutional thought has to start with that question.

Reader Discussion

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on June 04, 2013 at 14:32:20 pm

Doesn't the imposition of the limitation on state power over legal tender in Art. I, Sec. 10's necessarily presuppose that the power to make legal tender laws is a power reserved to the states? And if the power is reserved to the states, then from what font does federal authority to make paper money legal tender spew forth?

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Image of J.D.
on June 04, 2013 at 16:31:32 pm

I am neither a lawyer or an economist as evidenced by the fact that I am unable to discern which of the two is actually the "dismal" endeavor.
That being said, from a layman's perspective, it seems that there is no clear authority for printing paper money which I suspect delights the libertarians of the world. While understanding, and sympathetic to, their desire to return to the gold standard as a means of preventing the government from freely and wantonly printing dollars, and in so doing, debasing the currency and "stealing" the accumulated capital of it's citizens via inflation, the gold standard, in an of itself, is not immune to political manipulation, especially when considering foreign exchange. Witness the effects of Morgenthau's manipulation of the exchange rate during the 1920's to assist Great Britain. Some have argued that this was a contributing cause to the depression.
Mr. Greve laments the fact that unelected officials are entrusted with great (indeed awesome) power to enhance or destroy the people's wealth via Fed actions. This is certainly true but I must ask, would it really be better if "elected officials" were charged with the same responsibility? Does their record indicate that they would be better stewards of the economy? and does this not posit a "presumption of technical expertise" resident in elected officials that history does not support. More importantly, the temptation to substitute political considerations for sound long term economic calculations may, in fact, be overwhelming. Recall the kerfuffle between the Fed and Bush I prior to his re-election campaign ( as well as others).
In any event as Hayek has indicated it is simply impractical to conduct commerce in gold or silver coinage / bullion.
So we are stuck with an ambiguous declaration of Congressional power to coin money and issue debt. The passages cited above by Mr. Greve do not appear to support any state power to coin money; rather, it appears that there is a specific prohibition against any of the several states accepting anything other than what the Congress has determined to be legal tender in amounts and values determined by the Congress. How did we get to paper money; and while the same argument of convenience can be made for paper money, it is insufficient justification for assuming a power not specifically granted in the Constitution.
Again as a layman, I ask: Can the grant of power to Congress to issue debt be stretched to include the issuance of paper currency (even though it says "Federal Reserve Note" not "United States of America Note" on the bunch of dollar bills I
have in my pocket.

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Image of gabe
on June 04, 2013 at 18:20:37 pm

Oops! please substitute Mellon for Morgenthau.

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Image of gabe
on June 04, 2013 at 19:04:00 pm

It's clear enough that Congress has the power to "coin" money, which given the 10th amendment, denies it the power to print money. Further, the power to "regulate" the value of of coinage really does extend only to requiring the coins to have fixed composition and weight.

But I do agree that this doesn't imply that the federal government couldn't create coins of copper, zinc, lead, and so forth. What's questionable is it's power to insist that everybody has to exchange between specie at a particular ratio.

So, I'd say you got it 50% right: The Constitution doesn't mandate a gold standard, but it does prohibit fiat currency.

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Image of Brett Bellmore
Brett Bellmore
on June 04, 2013 at 21:12:19 pm

The Constitution is dead. It was killed as if by a thousand cuts. What we have for money today is basically Federal Debt Bonds,conjured out of thin air, backing paper money and credits conjured out of thin air created by a Central Bank called the Federal Reserve(which is neither Federal nor has any reserves) buying real goods and services in the American Market Economy. Quite a racket. The government gets all the purchasing power it needs and the bankers make a tidy profit on the debt interest. The people,on the other hand,get stuck with the bill. Not only current employees but future generations for years to come. This is why they want to force Social Security Numbers on newborns. Thus they can be tracked and followed,economically, all their entire lives. In reality Real money is gold and silver. Paper money was a receipt for that gold and silver. What the government did under FDR was to confiscate as much gold as possible and then use the paper receipts for the gold as money. The problem with this paper money system is that it is highly inflationary. Thus we have an Income Tax to mop up the excess spending power of the American people. Thus we have interest on debt to,again, to mop up the excess spending power of American citizens. Without fiat paper debt money,central banking and an Income Tax big government,constant wars and the welfare state would be impossible. This is why the founders put gold and silver clauses into the Constitution. They saw it as one barrier against a future tyrannical government. Once the fiat currency genie was released from its bottle, the American Republic was doomed. The only thing to do now is to wait for the inevitable collapse and then try to pick up the pieces.

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Image of libertarian jerry
libertarian jerry
on May 14, 2020 at 03:50:27 am

The interest rates are still low; however, the days of easy and quick financing are gone, and it’s quite tough now to get loans for investment properties due to the tightened credit markets. Although, if real estate investors do little preparation and use some creativity, they can still manage to get the needed financing.

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Jonathon trot

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